Munis make gains; dwindling supply spurs investors to the bond table.

Action was light ahead of the Christmas holiday yesterday, but municipals outperformed Treasuries in both the cash and debt futures market.

Tax-exempt bonds were firmer Friday and the positive tone spilled over into yesterday's session, traders said. The market opened quietly, but broke away from the government market, which suffered at the hands of Fed tightening rumors and higher commodities prices. Traders said municipals were beginning to enjoy the prospect of lower supply in early January coupled with greater demand. Buyers will probably have cash on hand from January redemptions and various payments, market players said.

Municipals were unchanged to 1/8 point higher. Some dollar bonds were quoted up 1/4 point.

In late trading, the Dade County 5s of 2013 were quoted at 5.33% bid, 5.30% offered; Florida MPA AMBAC 5.10s of 2025 were quoted at 5.43% bid, none; and Chicago O'Hare MBIA 5s of 2018 were quoted at 5.44% bid, 5.42% offered. Florida Board of Education 5.20s of 2023 were quoted at 96 5/8-7/8 to yield 5.43%.

The improved tone failed to make a dent in secondary supply, which was on the rise last week as demand faltered and issuers rushed the last of the year's big deals to market. From Dec. 2 to Dec. 13 The Blue List of dealer inventory was below $1.5 billion, something that had not happened since the 13-day period of Sept. 2 through 20. However, since demand dried up, The Blue List has ballooned $807 million, to $1.979 billion. That total is the highest since $1.981 billion on Nov. 5.

But bonds that broke from new issues yesterday traded near their original new-issue prices. For example, Dillon, Read & Co. freed $202 million of New York State Thruway Authority general revenue bonds to trade and the bonds traded even better than the original reoffering levels. In late secondary action, the MBIA 5s of 2014 were quoted at 5.22% bid, 5.20% offered, where they were originally offered to investors at 5.26%. The MBIA 5s of 2020 were quoted at 5.31% bid, 5.30% offered. They were originally priced to yield 5.35%.

In other follow-through action, Merrill Lynch & Co. freed $217 million of New York State Urban Development Corp. correctional capital facilities revenue bonds to trade. In late trading, the 5 3/8s of 2023 were quoted at 5.80% bid, 5.785% offered. The bonds were originally priced to yield 5.78%.

In the debt futures market, the March municipal contract settled up 5/32 to 102.20. The contract hit a low of 102.12 and a high of 102.22. The MOB spread narrowed to negative 381 from negative 392 on Friday, as municipals flew past a declining government market.

In the short-term note sector, yields were five to 10 basis points lower on the day, traders said.

In late action, California Rans were quoted at 2.02% bid, 2% offered; New Jersey Trans were quoted at 2.06% bid, 2.04% offered; and New York City Tans were quoted at 2.06% bid, 2.04% offered.

New-issue action was practically nonexistent, but the market faces the bulk of this week's new issuance today.

The negotiated sector is dominated by $575 million of New York State Urban Development Corp. correctional facilities and capital facilities revenue refunding bonds, to be priced by Goldman, Sachs & Co., and $105 million of North Carolina Municipal Power Agency No. 1 electric revenue bonds, also to be priced by Goldman.

The competitive slate features only $80 million of New York City general obligation improvement bonds, to be marketed today.

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